Friday, 28 October 2011

Last week, I encountered a problem with one of my students. I wasn’t sure what I ought to do so I turned to my colleagues here at the Robins School of Business and emailed them a cry for guidance.**

To: Fellow Faculty Members

For the first time in (at least) 25 years, I had a student sleep through a test. The test was at 10:30 on Friday and I got an email at 12:30 that he had stayed up late on Thursday studying and just slept through his alarm. He was hysterical, begging for mercy.

If you have ever had this happen, what do you do that makes sense?

Here are the factors:

1 – I absolutely do not want to set a precedent that I cannot live with in the future. I don’t want “I slept through the alarm” to become a common occurrence in my classes.2 – I don’t want to ruin the young man’s life. He just overslept – he didn’t rob a bank. I’ve overslept.3 – There were students who showed up for the test and failed (and will probably fail the course). I’m very concerned about being fair to them. I don’t want to penalize “showing up.”4 – I think he is telling me the truth but I don’t know that for sure.5 – I give three tests and a final exam. This test will be approximately 22 percent of his overall grade.6 – Although I do not know that it is relevant information, he made a solid D on the first test.7 – Although I do not know that it is relevant information, he has missed a few classes along the way this semester.

If you have ever faced this type of situation, what would you do? I’m really curious as to how people handle this kind of problem – other than a public beheading in the Atrium.**

I sent out this plea on a Saturday morning and within a very few hours I had received 24 different responses. I was very interested in two things: (1) the thoughtful nature of the responses and (2) the wide variety of suggestions. Everyone understood the situation and had some strong feelings about what was appropriate. How do you treat a student who has messed up? Should the punishment be harsh or nonexistent?

A few days later, I shared the responses with the faculty (anonymously) as well as my own final decision. I am not going to list all 24 responses here (but contact me at jhoyle@richmond.edu if you have an interest in seeing the entire list) but I have picked out several that I thought were fairly representative of the group. And, at the end, I explain what I did and why.

It was not an unbelievable situation.

What would you have done?**

Professor A - I have made the mistake of giving some students "a break" and I have regretted the decision. Here is my take. At the age of 20 - 21 some of our students are mature, responsible adults. Others are still in the process of growing up and learning to be responsible. The mature students never ask me to give them a break...they never seem to need one. The immature students ask and then ask again. In your situation I would give the student a zero. Given his performance thus far he will likely fail the class. However, I believe the University will let any student retake a course and the new grade appears on the transcript as well. It is better for this student to learn that actions have serious consequences while he is still in school. Better to fail a class than get fired. You can always tell him that he may not have learned Accounting, but he did learn Accountability.

Professor B - This is difficult. On one hand you don't want to reward the behavior, but it is also harsh to deal out such a stiff penalty. So here is what I normally do in something like this. I would have the student put the exam points toward the final. This is a penalty in that most students don't want to have so much riding on the final. But, if the student can perform on the final they have the opportunity to wipe out the mistake.

We live in an imperfect world and there is probably something wrong with whatever attempt we make to address a problem like this.

Professor C - I tell the students at the beginning of the semester that a missed test is a zero regardless of the situation. However, I did have one student have a family medical emergency and notify me before the exam. When exceptions absolutely must be made, I ask the student if they are willing to distribute the weight of the exam missed across all other assignments and exams. In every case, they have happily agreed. So for these students, I grade them in a way that essentially assumes they were not required to take the exam missed.

However, if this particular student were in my class I would not extend this option to him. If he is a D student that often misses classes and simply slept in, I would think that he needs a wakeup call to be more responsible. I would likely talk to him during my office hours and tell him this while giving him advice on how to improve his performance from here on out and probably require him to check in with me every week to make sure he's on top of his assignments. It is my opinion that allowing him to make up the exam in any way would just be enabling his bad habits to continue.

I would not view this as ruining his life. Rather, this is likely the wakeup call he needs. Better now by failing an exam/class than in the future by losing his job for similar behavior.

Professor D - I give a comprehensive final. If a student misses a test for any reason (this is not an opt out) that percentage goes to the final exam. That way they are tested on the material and I do not have to play judge or truth teller regarding the excuse. There are no "make up tests". In the past this has not proven to be a great option for the students grade wise and I let them know this up front. The policy is on the syllabus and seems to work well with regard to them making every effort to attend. This is especially true for MBA's.

Professor E - I usually offer the student two options: take the exam with a penalty applied to the grade (for example, 10 points off), or put the weight on the final or the other exams already taken.

Professor F - It sounds like he is having personal problems. I would talk with him and maybe make his being able to take the test contingent on him seeing someone in counseling or the Dean's office.

Or let him take the test and let him know you are concerned about him and are going to let the Dean's office know.

I am always dismayed by the number of kids who get transported to the hospital for alcohol overdoses, each week. I guess this is a nationwide problem, but it just reminds me of how vulnerable some of these kids are.

Professor G - If the public beheading really isn't an option, then I would say that points #6 & 7 absolutely are relevant. Were he a stellar student, I would feel more inclined to help. Failing a class will not ruin his life. In fact, it may enhance it. It is part of the educational experience to learn that most of life is about (1) being where you're supposed to be and (2) doing what you're supposed to do. But it's important to determine whether he's the kind of student that will benefit more in the long run from an act of grace or of justice.

With all that said, you could (privately) give him the option of dropping the course or count the final twice. I would never offer a make-up exam.

**Okay, here is what I did and I don’t know that I like this resolution at all but it’s done and I’ll stick with it.

If I had gotten the student’s email in time, I would have had him take the test on Friday afternoon with a 15-20 point penalty. However, I didn’t get the message until fairly late on Friday and I’m always a bit concerned about cheating. Once the exam was over, the other students had no reason not to talk about what was on the exam. The student grapevine is amazingly efficient.

If the student had an excused absence (health reasons, athletics, school activity, or the like), I might have given a makeup. However, I hate makeup exams because I find it very difficult to look at one set of answers all by themselves and know what that means. An N of 1 is always a problem. So, I prefer to simply give more weight to the other tests. That increases the risk but there is no penalty.

This was not excused, though. For this student, I would never give a makeup exam because I would have to do more work which makes no sense to me and I’m back to the problem of an N of 1.

I could have increased the weight on the other tests but that might actually be a reward. “I’ll have more time to study for the next test so I’ll just conveniently oversleep for this exam.” I thought there should be a real penalty but how serious should the penalty be for oversleeping?

Here was the major factor for me: I could not see giving him any chance at all of having a higher grade on this material than a student who actually showed up. That just seemed wrong to me. So, I told him that I would give him a grade of one point below the lowest test grade. That turned out to be a relatively high F.

But, and here is the point that I argued with to myself, I told him that I would only count this as half of an exam grade. I thought that was still a severe enough penalty that no one would ever want it. But it wasn’t crushing. I very much agree with what Professor F above says: “it just reminds me of how vulnerable some of these kids are.”

This blog went over a total of 40,000 pageviews about two days ago. I continue to be amazed by that number. However, I find that when a teacher contacts me about my writings, they almost invariably make the statement “Someone told me about your blog on teaching.” So, as always, I want to thank you for passing along the message. My guess is that I would have had about 4 pageviews in the last 22 months without your willingness to tell others. Thanks!!! That’s one of the great things about the Internet, people can spread the word.

As I occasionally do, here are my all time top ten blog entries based on readership. I am not sure they are the most interesting or the most clever or the most innovative. But the most people have read these ten.

The Groupon case is an interesting look at IPOs and how the investment banks that underwrite them suffer from very real conflicts of interests.

Groupon’s initial filing for an IPO valued the company at around $30 billion, but after the SEC found accounting and disclosure problems analysts decreased their valuations to as low as $10 billion. The article below raises an interesting question. If the investment banks (Morgan Stanley, Goldman Sachs, and Credit Suisse) fought so hard to win the underwriting mandate for the IPO, shouldn't they have caught these warning signs? Or as former SEC chief accountant Lynn Turner said, have they simply become sales and marketing agents? The article suggests that the higher fees associated with a higher valuation could be a reason the underwriters turned a blind eye. But shouldn't they also act in the interest of their institutional clients and the general public?

The underwriting firms seemed to have turned a blind eye and let several things slide. First, many have questioned the high valuation of $30 billion, especially given the company’s slowing growth rate and unsustainable working capital deficit. The above-mentioned accounting gimmick refers to a new metric that Groupon introduced in it’s filing, in which it conveniently left out major expenses such as marketing and acquisition-related costs. In addition, since the initial filing the SEC has twice forced Groupon to change the way it records revenue. Although technically legal, the previous methods for recording revenue were misleading investors on how fast Groupon has grown over the past two years. And since revenue was one of the main drivers for Groupon’s lofty valuation, lower revised revenue figures significantly altered the valuations in a very negative way.

However, it is hard to believe that investors were actually fooled by some of the metrics Groupon used. The generous valuations that were given to companies like Groupon and Linkedin have more to do with the hype surrounding their IPOs than the actual numbers involved. In a tech bubble-like scenario, firms can get away with much more "creative accounting," as evidenced by the fact that Zynga too created some obscure accounting metrics in their filings, and is now being valued at $15-20 billion.

But the investment bank’s role in all of this is a little more nuanced. Of course, it has to appease the interests of the company who is IPOing (and who wants to raise as much money as possible), but on the flip side it has to appease the interests of its institutional investors who are buying into the IPO (and who want to pay the lowest price possible to buy the company's shares). Therefore, it is still in the investment banks' best interests to properly value companies like Groupon and to raise the red flag when they see questionable accounting. At the end of the day, they might get higher commissions from the company for raising more proceeds in the IPO, but they will sour their relationships with institutional investors who get screwed over by overpaying for the company's shares.

In the Groupon case, it comes down to the fact that, like the rest of the market, investment banks got caught up in the hype of all of these tech IPOs. For example, Linkedin IPO'd at a ridiculous valuation (something like 17.5x 2010 sales), and yet it's stock more than doubled on the first day of trading. For the underwriters who led the IPO (Morgan Stanley, Bank of America Merrill Lynch, and JP Morgan), it was a win-win situation - the company received a generous valuation and its institutional investors made a killing. It's not really a surprise that the investment banks overlook some of these accounting gimmicks because, in a bubble-like environment, they can get away with it.

Thursday, 27 October 2011

The Chelsea Football Club has just lost their bid to re-purchase the land of their home stadium, Stamford Bridge, located in Southwest London, from Chelsea Pitch Owners. Chelsea Pitch Owners was a fan group set up in 1993 when the club was in financial difficulties and they “acquired the freehold of the pitch to protect Stamford Bridge, which has been Chelsea’s home for 106 years until then, from developers”.

The management team of Chelsea FC was hoping that through negotiations and a voting session, Chelsea Pitch Owners would sell their shares back to the club. However, at the crunch meeting in the Great Hall of Stamford Bridge today, only 61.6% of votes cast by the shareholders in Chelsea Pitch Owners were in favor of selling the freehold of the land on which the Stamford Bridge stadium sits. In order for the vote to have passed, there needed to be at least 75% vote for the proposal.

The result from today’s meeting would mean that Roman Abramovich, the Russian billionaire who has been the owner of Chelsea FC since 2003, has to postpone his ambitious plans for the expansion of Stamford Bridge. He has his reasons though, since the stadium has a current capacity of only 42,000 seats which puts it at a financial disadvantage from rivals such as Manchester United (Old Trafford Stadium 76,000 seats) and Arsenal (Emirates Stadium 60,000).

Records show that within a five-year span (2003-2008) of Abramovich buying Chelsea FC, he has already spent approximately £600 million on the club. And if he wishes to expand the club now, by purchasing the land of the stadium out of his own pocket, he might have to pay another £600 million for the “prime real estate”.

Nigeria, the tenth largest producer of oil worldwide, is beginning to amass its own wealth. While $59 billion in revenues from oil were generated in 2010, the federal government has no funds. How is it possible? Nigerian officials have often used savings “in reserve” for nationwide projects, the withdrawals never needing approval. Combined with public corruption and rampant poverty, it is unsurprising that any investor would consider entrusting their funds to the Nigerian government.

This is all about to change, however. Nigeria is beginning to craft a new sovereign wealth fund- revenue surpluses not used for immediate cash or consumption are invested in a federal account of financial instruments (assets normally held include stocks, bonds, property, and precious metals). Thus, Nigeria has been able to invest for its own future benefit. The wealth fund also provides Nigeria with a hedge against resource risks, as 80% of revenues come from oil. These include volatility of its oil prices and limited supply.

It is not Nigeria’s first sovereign wealth fund. They have, in fact, continued to run its original with little success. The fund, begun in 2004 as a means for nation savings, accumulated up to $20 billion in funds. Now, however, it holds less than $1 billion. It is clear that more regulation will be needed in this case for the sovereign wealth fund to sustain itself in the long run.

The fund has many leaders, however, which enables Nigeria’s future success. The fund will be managed by a former E&Y and Goldman Sachs employee from London, an experienced financier and Nigerian native. Along with JP Morgan, the fund will be structured to prohibit unnecessary withdrawals. Assets will be specified to serve a purpose, such as for investment in country infrastructure or education. If the right measures are put in place to profit on oil revenues, Nigeria may grow to be one of the wealthiest countries in the EMEA region.